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Is Marketing for the Average Good Enough?

04/27/2014 @ 1:07pm

The dairy market has made a significant advance upward the past six months with prices moving into record high territory. It appears dairy producers are becoming somewhat complacent with higher prices, anticipating that deferred months (due to their discount to the front months) will have to work higher. Often we hear dairy producers argue that, by doing nothing, they sell the average over time since they sell milk on a monthly basis. When prices are high, they receive the highest prices possible and are willing to accept the worst prices when prices are low. In theory, they are selling the average and are comfortable with this. We see three potential flaws with this approach.

The first flaw is that dairy producers who utilize this approach are assuming equal numbers of highs and lows. Therefore, if the market is $1.00 above the average six months of the year and below the average for six months by $1.00, then you have sold the average. Is that the way markets really work? Most likely not. Higher-priced markets have a tendency to be short lived, and low priced markets have a tendency to linger for longer periods of time. Therefore, if you are selling on a monthly basis, the argument of this approach is simply that, over time, you are selling below average.

The second potential flaw with this strategy, assuming you could sell the average, is you are at best "average". Is this ultimately the goal for your farm operation? Do you want to be just average? What about production and input purchases? Are you willing to only be average in these areas as well? If so, in a competitive industry (and dairy is), you will find yourself falling behind your peers. Why not strive to be excellent in marketing, input purchases and production?

As marketers, you should be executing the best business practices possible to  build a weighted average price that over time shifts risk and takes advantage of opportunities. Marketing can take tremendous effort and become filled with lots of second guessing. In the end, those who approach the market from the right perspective utilizing the right strategies will likely surface as above average over time.

The third flaw that we see is the potential to forego significant value opportunities that could present themselves. As an example, what if you sold futures for the next six months? If prices dropped hard the next two months, you may be able to pull gains out of the market. Our point is you can manage the market rather than letting the market manage you.

Now is the time to plan. Hoping for the best and accepting average is, over time, a recipe for low or non-growth. Everything changes over time. Challenge yourself to be an above average marketer.

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